Verizon's 4G Plan Will Try Tiered Pricing

Verizon Wireless customers can expect tiered pricing when the carrier implements its Long-Term Evolution mobile broadband network later this year, the carrier's CEO said this week.

Gone will be the monthly plans that Verizon currently offers—instead, customers will pay for predetermined buckets of wireless data each month. It's unclear if those buckets can be altered to higher or lower data amounts during a customer's contract. Yet one thing is clear: Offering pay-per-use plans allows Verizon to ensure high margins.

With 3G networks, carriers already provide data plans in two typical tiers: About 200 to 250 MB at a given price, and an "unlimited" plan at a higher price. The so-called unlimited plans are typically capped at 5 GB and can include overage charges (T-Mobile recently eliminated such fees and may reduce bandwidth after 5 GB of data are used).

The smaller buckets work fine for basic daily Web activities, such as e-mail, light browsing, and social networking updates. But add in video content, music streaming, or other bandwidth-intensive uses, and you'll quickly see the bucket overflow. The same applies to the unlimited 3G plans—you can burn through a monthly 5 GB plan with just 5.68 hours of video. The problem with today's pricing is that carriers such as Verizon have no idea how customers will use the network, so they can't plan for demand, which varies by activity and the user's type of device.

No Buffet When the Menu's à la Carte

With tiered pricing, the burden of forecasting demand shifts to the consumer. I suspect Verizon will allow customers to modify the size of their data bucket routinely for this reason—multiple-tiered choices with no room to change won't help the demand forecasting problem. In this case, if you expect to be on the road for a few weeks and plan to stream a season of Heroes on Netflix, for example, you can plan to purchase enough data throughput to watch it from start to finish. Whereas if your travels are confined to the home office or the local Starbucks, where you can use Wi-Fi, the purchase of a smaller data bucket makes more sense—both for you and for the carrier providing the network. The carriers' argument to the consumer is that she will benefit from less network congestion—and that you don't expect an all-you-can-eat buffet experience at an à la carte restaurant, so why expect it from a mobile broadband network?

"LTE will help force costs down 60 percent on a per-megabyte basis, but usage might go up by the same amount. Most of the gains [for network upgrades] are in the cost savings, but with faster throughput, things will download faster and people will do more of it, and since the price of the service is fixed, the cost of delivering the content will only go up."

Avoiding the Bad Old Days

Tiered pricing offsets the cost of delivering content because all customers will pay for what they're truly using, which helps moderate the delivery costs while also hedging Verizon's profit margin. Stacey expands on that point in her GigaOM Pro report, "Metered Mobile: Pricing for Profits" (subscription required). She also underscores the expected Verizon pricing model, noting the carrier is "trying to figure out how to encourage usage and keep margins for mobile broadband high without overloading [its] networks or driving users back to the bad old days, when everyone was too afraid to open the Web browser on their phone for fear of exorbitant data fees."

While we don't yet know the details of the LTE pricing buckets, we shouldn't have long to wait. Three to five LTE handsets could be launched in the first half of 2011 as Verizon plans to bring LTE to nearly 30 U.S. markets before the end of 2010 .